FI-AA Compliance With IFRS

1
Tips and Techniques to Manage Asset Accounting Activities to Stay in Compliance with IFRS
Eric Barlow Managing Partner Serio Consulting
In This Session
Asset Accounting (FI-AA) is one of the areas most impacted by IFRS

The SAP solution of many US-based companies is ill prepared to accommodate IFRS Lets go beyond the theory of IFRS and discuss tangible solutions in SAP
How does configuration need to change to accommodate IFRS? How do business processes need to change to accommodate IFRS?
Does SAP provide new solutions for IFRS?
Source: Eric Barlow, Fixed Assets and IFRS Compliance in SAP, slide #3
What Well Cover
General Ledger design impacts on IFRS solution in Asset Accounting

Changes to Asset Accounting configuration for IFRS
IFRS requirements impacts Asset Accounting process impacts Wrap-up
General Ledger Design Impacts on IFRS Solution in FI-AA
Parallel Accounting is the biggest challenge to a successful implementation of IFRS for most US-based customers
SAP solutions designed exclusively for US GAAP and US Tax are not configured to accommodate the multiple standards required by IFRS
The Asset Accounting (FI-AA) solution is dictated by the General Ledger design
General Ledger Design Impacts on IFRS Solution in FI-AA (cont.)
There are many ways in SAP to manage the multiple scenarios (US GAAP, Local GAAP, IFRS) that are required by adoption of IFRS
There is a parallel accounting solution for every customer but the best solution will vary depending on time, budget, requirements, and existing SAP Solution
The GL design is the first and most important step to successful implementation of IFRS as it establishes how parallel accounting will be managed
Pre SAP ERP (SAP R/3 4.7 and earlier)

With no upgrade to SAP ERP 6.0
Account Solution Parallel Company Codes Special Purpose Ledger
Upgrade to SAP ERP 6.0

Migrate to SAP General Ledger Account Solution Special Purpose Ledger Parallel Ledger
SAP ERP with SAP General Ledger

Account Solution Special Purpose Ledger
Parallel Ledger
SAP ERP with classic General Ledger

Account Solution
Special Purpose Ledger

Migrate to SAP General Ledger
Account Solution Special Purpose Ledger Parallel Ledger
What is an Account solution?

Uses single ledger for all postings
Could be the Leading Ledger for SAP General Ledger
Pure IFRS
Accounts
Pure Local GAAP Accounts
Accounts are grouped according to legal reporting requirements

Example 300000 to 400000 Operational Chart 500000 to 550000 IFRS 600000 to 650000 Local GAAP
Common Accounts
Each group of accounts must be in balance

Requires extra care to ensure correct account determination And the establishment of a coding handbook
IFRS Financial Statements report using common accounts and pure IFRS accounts together
Red oval in diagram
Account solution is recommended where:

Relatively few valuation differences exist between IFRS and local GAAP No issue with an increased number of GL accounts
Standard reporting is used

Different fiscal years not required
What is a Parallel Company Code solution?

FI-AA can post from additional valuation areas into additional company codes (supports depreciation posting and gain/loss from sale of assets) FI-AA is not activated in additional company codes Valuation adjustments via valuation area 01 posts online and is always carried in the GL of the main company code This approach is supported only for FI-AA, FI, and manual postings
Involves high volume of manual postings

SAP not planning any enhancements in this area
Parallel Company Codes is recommended where:

Increased number of GL accounts is an issue Valuation differences only result from FI-AA, FI, or manual postings Standard reporting is used
Larger number of company codes is not problematic

Various company codes do not need different GL account names
What is a Parallel Ledger solution?

Provides IFRS and local accounting standard reporting from multi-ledgers
Can be configured to meet both reporting requirements from the first go-live date
Utilizes the best features of the SAP General Ledger

Document splitting Segment reporting Etc.
Recommended option for complex installations

Large differences between IFRS reporting standards and the current legal reporting standard
What is a Parallel Ledger solution?

Feeds properly formatted IFRS data directly into the reporting and analytics layer
Simplifies reporting and requires little manual adjustment after consolidations
Implementation from the beginning of fiscal year

Matches IFRS timeline
Parallel Ledger configuration is recommended where:

Segment reporting is required Increasing the number of SAP General Ledger accounts is not desirable
Complete set of separate legal reporting books is preferred

Different fiscal year is needed for different legal sets of books
What is a Special Purpose Ledger solution?

Additional Special Ledgers (SL) are set up to maintain a parallel set of ledgers for each accounting principle Automatic valuation methods can create entries into either ledger as appropriate Accounting principle controls posting destination ledgers Data transfer from Main Ledger to Special Ledgers through Integration Manager and data selection rules Postings to Special Ledgers from FI, FI-AA, CFM, MM, SD, and CO
Special Purpose Ledger is recommended where:

Large number of GL accounts not desirable Complete set of separate books for each accounting principle is preferred Different fiscal year is needed
Access to FI data from SL reports is not needed

Large number of valuation differences exist

Approach
Account-Based
Comments
SAP R/3 X
SAP ERP X
Recommended? Yes
Easiest to implement Can lead to unmanageable COA in SAP General Ledger No additional functionality planned by SAP Not a recommended solution for most companies Most transparent approach Independent set of books Future IFRS requirements more easily accommodated No additional functionality planned by SAP
Parallel Company Codes
No
Parallel Ledger
Yes
Special Ledger
No
Not a recommended solution for most companies
What Well Cover

Changes to Asset Accounting Configuration for IFRS
Asset Accounting requires parallel valuations to be tracked for each asset in order to produce financial statements in US GAAP and IFRS
Each valuation (depreciation area) must:
Track cost and depreciation separate from the other valuations Be capable of using different useful lives and depreciation terms
Be posted to the GL in order to produce financial statements by valuation
Changes to Asset Accounting Configuration for IFRS (cont.)
Most US-based FI-AA solutions manage a single valuation (US GAAP)

Managing and integrating multiple valuations from Asset Accounting into the GL is the first challenge to implementing IFRS in Asset Accounting!

Current Solution
FI-AA
Area 01 US GAAP Area 10 ACRS/MACRS Area 11 AMT Area 31 US GAAP Parallel
GL
US GAAP Accounts in Local Currency
US GAAP Accounts in Parallel Currency

Example: Account Solution
FI-AA
Area 01 US GAAP Area 02 IFRS Area 10 ACRS/MACRS Area 11 AMT Area 31 US GAAP Parallel
GL
US GAAP Accounts in Local Currency IFRS Accounts in Local Currency
US GAAP Accounts in Parallel Currency IFRS Accounts in Parallel Currency
Area 33 IFRS Parallel
IFRS Solution for FI-AA Using an Account Solution
Add new Depreciation Area(s) for IFRS

Configure new area(s) to update the Alternative Accounts Add new accounts to the COA to receive the parallel valuation postings
Adjust month-end processes to incorporate periodic processing from Asset Accounting

Adjust GL and Asset Accounting reporting processes to incorporate new accounts and depreciation areas
Adjust RICEFs to accommodate new areas and processes Build preventative measures to avoid mixing main and alternative accounts in an unbalanced posting
IFRS Solution for FI-AA Using a Parallel Company Solution

Configure new area(s) to update the Parallel Company Codes Adjust month-end processes to incorporate periodic processing from Asset Accounting to additional Company Codes
Adjust month-end processes to additional Company Codes Adjust General Ledger and Asset Accounting reporting processes to incorporate new Company Codes
Adjust RICEFs to accommodate new Company Codes
IFRS Solution for FI-AA Using a Special Ledger Solution

Add Special Purpose Ledgers (SPL) and configure them accordingly
Configure new area(s) to update SPL(s) Adjust month-end processes to incorporate periodic processing from FI-AA to SPL(s)
Adjust General Ledger, SPL, and FI-AA reporting processes to incorporate new SPL(s) and depreciation areas
Adjust RICEFs to accommodate new areas and processes
IFRS Solution for FI-AA Using a Parallel Ledger Solution

Configure new ledgers in SAP General Ledger Configure relevant area(s) to update appropriate Ledger Groups Adjust month-end processes to incorporate periodic processing from Asset Accounting
Adjust General Ledger and Asset Accounting reporting processes to incorporate new ledgers and depreciation areas
Adjust RICEFs to accommodate new ledgers and processes
What Well Cover

IFRS Requirement Impacts
IAS16/IAS36 Fixed Assets/ASC 360 Plant, Property & Equipment

Componentization Subjective but significant parts need to be separated
Depreciation Components depreciated separately

Valuation Impairments reversible; Revaluations optional
IAS17 Leases/ASC840 Leases

Land and Building assets considered separately
Not limited to PP&E
IAS38 Intangible Assets/ASC350 Intangibles (ASC730 R&D)

Revaluation permitted
Development costs capitalized
IFRS Requirement Impacts Componentization
IFRS Componentization Requirement

Definition of an asset is subjective Grouping of minor assets allowed
Components of an asset may be grouped if useful life and depreciable method are identical Assets are separated into components if significant cost components differ in their useful life
US (ASC360-30) Componentization
Asset are allowed to be grouped
Asset componentization allowed but rarely used
Asset componentization is prescribed for some regulated industries
IFRS Requirement Impacts Componentization (cont.)
Impacts of Componentization on SAP

Master data
Asset Classes Conversion Changing from current assets to componentized assets
Transactions
Asset creation and capitalization processes must be reviewed
Identify impact on follow-on assets processes
IFRS Requirement Impacts Depreciation
IFRS Depreciation Requirement

Asset retirement requires Income Statement gain or loss Idle assets must continue to depreciate
Asset components are depreciated separately

Estimation of useful life is subjective based on similar assets
US (ASC360-35) Depreciation
Ordinary gain or loss on retirement is deferred to balance sheet accumulated depreciation for grouped assets Income Statement gain or loss only on extraordinary asset retirement
Grouping of assets for depreciation is allowed
IFRS Requirement Impacts Depreciation (cont.)
Impacts of Depreciation Differences on SAP

Design
Is reallocation of depreciation reserves required to support componentization?
Master data
Do current depreciation keys support componentization? Do current default depreciation keys and lives support componentization?
Transactions
Impacts on depreciation forecast or retirement process?
IFRS Requirement Impacts Valuation
IFRS (IAS36) Impairment

The objective is to ensure assets are carried at no more than their recoverable amount Assets of Revenue Generating Units must test that all assets do not have a carrying value which exceeds the recoverable value
If so, assets are adjusted to the higher of fair value less selling costs or the value in use
US (ASC360-35) Impairments
Done by asset group
Two-step test
1. Carrying value exceeds recoverable value, and 2. Carrying value exceeds fair value
Review based on changes in circumstance
Loss reversal prohibited
IFRS Requirement Impacts Valuation (cont.)
IFRS (IAS16) Revaluation

Optional For entire class of assets
Fair value less impairment and accumulated depreciation
US (ASC360-40) Revaluation
Revaluation is not permitted
PP&E valued at historical cost
IFRS Requirement Impacts Leased Assets
IFRS (IAS17) Leases

Scope not limited to PP&E Land and building are considered separately unless land is immaterial
Finance (capital) lease if:

Lease term comprises substantial portion of asset life Present value of lease payment covers substantially all of assets fair value
Sale leaseback gain/loss

Amortized over lease term if finance Recognized immediately if operating
IFRS Requirement Impacts Leased Assets (cont.)
US (ASC840) Leases
Land is considered separately if 25% or greater of lease fair value Capital lease if:
Lease term is greater than 75% of asset life Present value of lease payment is greater than 90% of asset fair value Two tests for lessor sale-type lease Collection is reasonably expected Un-reimbursable costs are certain Then, replace asset with receivable if capital
Sale leaseback gain/loss

Recognize now if seller relinquishes Amortize over term if seller controls
IFRS Requirement Impacts Leased Assets (cont.)
Master Data
Check asset classes to ensure all required lease asset types are covered Amend screen layouts to include leasing data fields if needed
Transactions
Review capitalization processes to ensure proper compliance of leasing requirements
Review depreciation postings for leased assets to ensure proper accounting treatment
IFRS Requirement Impacts Intangible Assets
IAS38 Applies to Intangible Assets that have three critical attributes:

Identifiable
Control (power to obtain benefits from the asset)

Future economic benefits (such as revenues or reduced future costs)
IFRS Requirement Impacts Intangible Assets (cont.)
IAS38 Does not apply to:

Financial assets Exploration and evaluation assets (extractive industries)
Expenditure on the development and extraction of minerals, oil, natural gas, and similar resources Intangible assets arising from insurance contracts issued by insurance companies Intangible assets covered by another IFRS, such as intangibles held for sale, deferred tax assets, lease assets, assets arising from employee benefits, and goodwill
IAS38 Intangible Assets

Development costs are capitalized if asset is
Technically feasible Intended for completion, or Saleable in the future
Revaluation allowed
Impairment adjustments
Loss reversal is allowed
Include indefinite life assets At least annually Use fixed asset methods
US (ASC350, ASC730) Intangible Assets

Development costs expensed as incurred except capitalize
Software for external use, after technical feasibility Software for internal use, only during development stage
Revaluation not allowed
Impairment adjustments
Reversal of loss prohibited Include indefinite life assets When conditions change Use PP&E methods
IAS38 Impacts on SAP Intangible Assets Continued
Master Data
Check asset classes to ensure all intangible asset types have an appropriate class
Transactions
Review capitalization processes to ensure intangible costs are captured and capitalized correctly Review depreciation postings for intangible assets to ensure proper accounting treatment
What Well Cover

Asset Accounting Process Impacts
Daily Processes
Procurement and Capitalization processes must be reviewed in order to ensure compliance with IFRS Accounting methods across standards must be reviewed so that the proper downstream accounting solution (account-based, SPL, additional ledger) is considered
Asset Accounting Process Impacts (cont.)
Monthly Processes
Periodic Posting of AA balances to the General Ledger must be included in the month end (not previously needed when one standard was used) Incorporate new monthly postings related to impairments, revaluations, leases, etc. Add month-end close steps for additional ledgers or company codes Update month-end reporting solution to include additional ledgers, company codes, or accounts
Asset Accounting Process Impacts (cont.)
Year-End Processes
Update year-end processes to include additional ledgers, company codes or accounts. Examples are:
Roll Fiscal Year Balances Close Fiscal Year
Include the same in year-end reports
What Well Cover

Resources
www.ifrs.org/NR/rdonlyres/FBE30248-225B-48AF-AAE596494D83A978/0/LeasesSnapShot0810.pdf
Paper describing IAS17 and its impact on Leases
www.ifrs.org/NR/rdonlyres/2D5D6C15-65CE-4430-AB1D1E4E4E74D7FE/0/IAS16.pdf
Paper describing IAS16 and its impact on PP&E
www.ifrs.org/NR/rdonlyres/715CDD70-96A4-4D37-B53AA0E4E61FB828/0/IAS36.pdf
Paper describing IAS36 and its impact on Impairments
www.ifrs.org/NR/rdonlyres/8A3C6720-AABE-4BE2-B7760BBE51961AA0/0/IAS38.pdf
Paper describing IAS38 and its impact on Intangible Assets
7 Key Points to Take Home
IFRS rule changes are well documented but little time has been spent focused on the How Tos of implementing IFRS in SAP
SAP solutions designed for US GAAP and US Tax must change to accommodate multiple standards (e.g., US GAAP, US Tax, and IFRS) General Ledger design is the first critical design choice to a successful implementation of IFRS The General Ledger design is very flexible but can be constrained by the SAP release in use
Asset Accounting solution must change to follow the General Ledger solution
7 Key Points to Take Home (cont.)
Asset Accounting design and processes must change to accommodate IFRS

IFRS impacts in Asset Accounting are primarily:
Componentization
Leases Impairments
Depreciation
Intangibles
Thank you for your attention
Eric Barlow
Managing Partner Serio Consulting LLC 227 Sandy Springs Place Suite D238 Atlanta, GA 30328
T 1-404-667-0447 F 1-866-535-0639 E Eric.Barlow@SerioConsulting.com http://www.SerioConsulting.com
The preeminent world-wide service provider of the SAP Capital Management solution
Any further questions?

FI-AA Compliance With IFRS

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1

Asset Accounting (FI-AA) is one of the areas most impacted by IFRS

What Well Cover

General Ledger design impacts on IFRS solution in Asset Accounting

IFRS requirements impacts Asset Accounting process impacts Wrap-up

General Ledger Design Impacts on IFRS Solution in FI-AA

General Ledger Design Impacts on IFRS Solution in FI-AA (cont.)

General Ledger Design Impacts on IFRS Solution in FI-AA (cont.)

Pre SAP ERP (SAP R/3 4.7 and earlier)

Upgrade to SAP ERP 6.0

General Ledger Design Impacts on IFRS Solution in FI-AA (cont.)

SAP ERP with SAP General Ledger

SAP ERP with classic General Ledger

Special Purpose Ledger

General Ledger Design Impacts on IFRS Solution in FI-AA (cont.)

What is an Account solution?

Pure Local GAAP Accounts

Accounts are grouped according to legal reporting requirements

Each group of accounts must be in balance

General Ledger Design Impacts on IFRS Solution in FI-AA (cont.)

Account solution is recommended where:

Standard reporting is used

General Ledger Design Impacts on IFRS Solution in FI-AA (cont.)

What is a Parallel Company Code solution?

Involves high volume of manual postings

General Ledger Design Impacts on IFRS Solution in FI-AA (cont.)

Parallel Company Codes is recommended where:

Larger number of company codes is not problematic

General Ledger Design Impacts on IFRS Solution in FI-AA (cont.)

What is a Parallel Ledger solution?

Utilizes the best features of the SAP General Ledger

Recommended option for complex installations

General Ledger Design Impacts on IFRS Solution in FI-AA (cont.)

What is a Parallel Ledger solution?

Implementation from the beginning of fiscal year

General Ledger Design Impacts on IFRS Solution in FI-AA (cont.)

Parallel Ledger configuration is recommended where:

Complete set of separate legal reporting books is preferred

General Ledger Design Impacts on IFRS Solution in FI-AA (cont.)

What is a Special Purpose Ledger solution?

General Ledger Design Impacts on IFRS Solution in FI-AA (cont.)

Special Purpose Ledger is recommended where:

Access to FI data from SL reports is not needed

General Ledger Design Impacts on IFRS Solution in FI-AA (cont.)

Parallel Company Codes

Not a recommended solution for most companies

What Well Cover

General Ledger design impacts on IFRS solution in Asset Accounting

IFRS requirements impacts Asset Accounting process impacts Wrap-up

Changes to Asset Accounting Configuration for IFRS

Be posted to the GL in order to produce financial statements by valuation

Changes to Asset Accounting Configuration for IFRS (cont.)

Most US-based FI-AA solutions manage a single valuation (US GAAP)

Changes to Asset Accounting Configuration for IFRS (cont.)

US GAAP Accounts in Parallel Currency

Changes to Asset Accounting Configuration for IFRS (cont.)

US GAAP Accounts in Parallel Currency IFRS Accounts in Parallel Currency

Area 33 IFRS Parallel

IFRS Solution for FI-AA Using an Account Solution

Add new Depreciation Area(s) for IFRS

Adjust month-end processes to incorporate periodic processing from Asset Accounting

IFRS Solution for FI-AA Using a Parallel Company Solution

Add new Depreciation Area(s) for IFRS